Case Law Details
M/s. Nov Sara India Pvt. Ltd Vs Addl. CIT (ITAT Delhi)
Software development expenditure which was held to be capital expenditure by the Assessing Officer holding that it has given a benefit of enduring nature to the assessee. The claim of the assessee is that same is a license fee and, therefore, it cannot be giving any benefit of enduring nature. The learned CIT (Appeals) held that it was for the development of new products and, therefore, same is a capital expenditure.
The above expenditure is product development expenditure and not software development expenditure. The above expenditure has been paid as a professional fees to M/s. Express Marketing, Dehradun, towards development of new product in unit I related to equipment required by rigs in oil industry. It was not a new line of business, but was merely expenditure in development of the existing line of the business. The assessee is engaged in the business of manufacturing of machineries and equipments and development is for the same product. In view of this such expenditure cannot be held to be capital expenditure, but it is a revenue expenditure.
FULL TEXT OF THE ITAT JUDGMENT
These are the cross appeals filed by the assessee and Revenue against the order of Commissioner of Income Tax (Appeals)–I, New Delhi, dated 30.09.2014 for assessment year 2009 10.
2. The assessee has preferred the following grounds of appeal :
1. That on the facts and circumstances of the case and in law. the Hon ble CIT (Appeals) has erred in disallowing a sum of Rs.31,90,217/ being other income of nit I for the purpose of deduction under Section 80IC of the nit I inter alia because.
1.1 The said sum represented incomes on account of service charges, interests, miscellaneous incomes etc. which were directly derived from the manufacturing activity of nit I.
2. That on the facts and circumstances of the case and in law. the Honble CIT (Appeals) has erred in restricting the deduction under Section 801C of the nit II to Rs.5,69.61.935/ as against Rs.8,22,65,833 claimed by the Appellant inter alia because.
2.1 That the addition of Rs.2.53.03,398/ made by denying the deduction under Section 80IC of the Act on export incentives, interest incomes which were directly derived from the manufacturing activity of nit II.
3. That on the facts and circumstances of the case and in law. the Honble CIT (Appeals) has also erred in disallowing the product development expenses amounting to Rs.18.86.648/ inter alia because.
3.1 The said expenditure was of the nature of revenue expenditure and not capital expenses as wrongly held by the Honble CIT (Appeals),
3.2 The Honble CIT (Appeals) has erred in holding that the said expenditure ought to be amorti ed in live eual installments without mentioning under which provision of the Act the amortiation of expenses is permissible.
3.3 ithout prejudice, the Hon ble CIT (Appeals) ought to have allowed depreciation under Section 32 at the prescribed rates on product development expenses.
3. The Revenue has preferred the following grounds of appeal :
1. The Ld. CIT (Appeals) has erred in law and on facts in respect of profits / gains of the assessee in respect of nit 1.
2. The Ld. CIT (Appeals) has erred in law and on facts in allowing a sum of Rs.1,06,34,057/ being other income nit 1 for the purpose of deduction u/s. 80IC of the nit 1.
3. The Ld. CIT (Appeals) has erred in law and on facts in restricting disallowance u/s. 14A to Rs.3625/ as against Rs.80635/ disallowed by the Assessing fficer in accordance with Rule 8D of Income Tax Act.
4. The brief facts of the case is that assessee company is engaged in the business of manufacturing of machinery and e uipments for oil well drilling and production activities. It also distributes its products worldwide. For assessment year 2009 10 assessee filed its return of income on 27.09.2010 declaring income of Rs. 17,79,10,920/ under the normal provision and book profit under section 115 B of the Act was declared at Rs.32. 15 crores.
5. The assessee has two units which are eligible for deduction under section 80IC of the Income Tax Act. The learned Assessing fficer noted that assessee has unit one as capital product unit and unit II as commodity product unit. The assessee has credited the miscellaneous income with respect to sale of licenses, service charges, interest on fixed deposit received, interest on others, miscellaneous income and security bonds forfeiture income aggregating in all of Rs.3,68,90,722/ . The assessee has included all these income part of the business income and claimed deduction under section 80IC thereon. The learned Assessing fficer further noted that assessee has incurred substantial expenses under the head Head ffice Expenses and claimed huge losses of Rs.5.33 crores thereby there is an excess claim of deduction under section 80IC of the Act. In view of this, he recomputed the deduction and held that same as not allowable on service charges of Rs.57,29,397/ , interest on fixed deposit received of Rs.42,99,973/ , interest on others of Rs.4,91,299/ , miscellaneous income of Rs.4,21,342/ and security bonds forfeiture account of Rs. 1,34,216/ . In view of this he disallowed the deduction to the extent of such other incomes of Rs.1,06,34,057/ . According to him these income are not derived from Industrial undertaking.
6. Furthermore, he disallowed the deduction under unit I holding that in earlier years it was disallowed. The reason for disallowance was that assessee could not justify the substantial expansion. He disallowed the deduction of Rs.6,52,83,501/ .
7. He further disallowed a sum of Rs.2,53,03,898/ for deduction under section 80IC in respect of unit No. II where export incentive of Rs.2,52,75,146/ and interest on others amounting to Rs.28,752/ was credited by the assessee and also claimed deduction under section 80IC thereon. According to the learned Assessing fficer such income is not derived from the industrial undertaking.
8. Further the software development expenses of Rs.18,86,648/ was also disallowed holding it to be capital expenditure. Conseuently the assessment order under section 143(3) of the Act was passed on 28.03.2013 at a total income of Rs.29,69,07,632/ against the returned income of the assessee at Rs.17,79,10,920/ .
9. The assessee aggrieved, preferred an appeal before the learned CIT (Appeals). He allowed the deduction to the assessee under section 80IC of the Act holding that unit I is not eligible on substantial expansion for such deduction. He further held that a sum of Rs. 1,06,34,057/ credited to the other income as unit I is also eligible for deduction under section 80IC of the Act. He deleted the disallowance under section 14A of the Act restricting it to investment on which exempt income is earned. However, the learned CIT (Appeals) restricted disallowance of Rs.31,90,217/ , being other income of unit I for the purpose of deduction under section 80IC of the Act 30 . He also held that soft ware expenditure is capital expenditure. n soft ware he further directed the Assessing fficer that such expenditure is reuired to be amorti ed in 5 e ual instalments. Therefore, aggrieved by the order of the learned CIT (Appeals) both the parties are in appeal before us.
10. Now we first take up ground No. 1 of the appeal of Revenue. The ground No. 1 of the appeal is that the assessee is not entitled to deduction under section 80IC of the Act with respect to unit I as it has not fulfilled the conditions of substantial expansion provided in section 80IC(8) of the Act. The learned CIT (Appeals) has allowed the claim of the assessee based on his own decision in case of the assessee for earlier years. The decision for earlier years was also upheld by the Coordinate Bench in its order dated 18.01.2016 for assessment years 2004 05 to 2006 07 in I.T. Appeal Nos. 545 to 547 (Del) of 2010.
11. e have heard the rival contentions on this issue. However, as the issue is already decided in favour of the assessee on the same set of facts in earlier years wherein vide para No. 11 the Coordinate Bench has allowed the claim of the assessee for deduction under section 80IC of the Act on substantial expansion.
12. The learned Departmental Representative could not show us any reason to deviate from the same. Therefore, respectfully following the decision of the Coordinate Bench in assessee s own case for earlier years, we dismiss ground No. 1 of the appeal of the Revenue.
13. round No. 2 of the Revenue s appeal and ground No. 1 of the assessee s appeal is with respect to the various other incomes credited as income derived from the industrial undertaking and further allowing deduction under section 80IC of the Act on the same. During the year the assessee has earned following income with respect to unit I amounting to Rs. 1,06,34,057/ on which the learned CIT (Appeals) has held that they are not derived from industrial undertaking, but disallowance can be only to the extent of 30 as unit is eligible for deduction under section 80IC of the Act. In fact the ground is misconstrued by the Revenue. In fact the impugned assessment year being the 6th assessment year and assessee is not eligible for deduction of the other income 100 but only 30 and, therefore, following his own decision for assessment year 2004 05 he has restricted the total deduction at Rs.31,90,217/ being 30 of Rs. 1,06,34,057/ . In view of this, the ground No. 2 of the Revenue does not survive, hence dismissed.
14. Now we come to ground No. 1 of the appeal of the assessee wherein the assessee contests the disallowance of Rs.31,90,217/ being 30 of 1,06,34,057/ . It was contended before us that identical issue arose in case of the assessee for assessment years 2004 05 to 2006 07 wherein the Coordinate Bench vide order dated 18.01.2016 has set aside the whole issue back to the file of the learned Assessing fficer for proper adjudication with respect to each of the income. Similarly for assessment years 2007 08 and 2008 09, the Coordinate Bench set aside this issue back to the file of the Assessing fficer following the earlier decision of the Coordinate Bench. Therefore, the claim of the assessee is that same may be set aside to the file of the learned Assessing fficer for this year too.
15. The learned Departmental Representative did not express any serious reservation to the above proposition. As the similar income with the same nature of earnings is reuired to be adjudicated in the earlier years by the Assessing fficer, it would be unfair for us to give our finding on this income as it will negate the earlier orders of the Coordinate Bench. So, we also set aside the whole issue back to the file of the Assessing fficer to test each of the income whether they are derived from the industrial undertaking or not by considering the decision of the Hon ble Supreme Court in the case of Liberty India s. CIT 317 ITR 218 (SC) and then decide whether deduction under section 80IC of the Act is eligible or not on such income. Accordingly ground No. 1 of the appeal of the assessee is allowed with above direction.
16. round No. 3 of the appeal of the Revenue is against restriction of disallowance under section 14A of Rs.80,635/ to Rs.3,625/ . The learned Assessing fficer disallowed the sum of Rs.80,635/ applying the provisions of Rule 8D of the Act. However, the learned CIT (Appeals) held that the assessee company has investment of Rs.29,86,720/ in companies as e uity shares out of which a sum of Rs.22,61,720/ as investment in a S company. As the dividend income, if any, receivable from S company is not an exempt income, therefore, he held that only half per cent of an average value of exempt income to the extent of investment in an Indian company of Rs.7.25 lakhs amounting to Rs.3,625/ could be disallowed under section 14A of the Act.
17. The learned Departmental Representative could not point out any infirmity in the order of the learned CIT (Appeals) to this extent with respect to expenditure. Further with respect to the interest expenditure, it was held that assessee has sufficient funds as paid up capital which fairly exceeds the investment of Rs.7.25 lakhs and, therefore, no disallowance can be made. e do not find any reason to disagree with the above proposition of the learned CIT (Appeal). In view of this, ground No. 3 of the appeal of the Revenue is dismissed.
18. e now come to ground No. 2 of the appeal of the assessee, which was not pressed before us and, therefore, the same is dismissed.
19. Now we come to ground No. 3 of the appeal where the assessee has incurred expenditure of Rs.18,86,648/ on account of software development expenditure which was held to be capital expenditure by the Assessing Officer holding that it has given a benefit of enduring nature to the assessee. The claim of the assessee is that same is a license fee and, therefore, it cannot be giving any benefit of enduring nature. The learned CIT (Appeals) held that it was for the development of new products and, therefore, same is a capital expenditure.
20. We have heard the rival contentions. The above expenditure is product development expenditure and not software development expenditure. The above expenditure has been paid as a professional fees to M/s. Express Marketing, Dehradun, towards development of new product in unit I related to equipment reuired by rigs in oil industry. It was not a new line of business, but was merely expenditure in development of the existing line of the business. The assessee is engaged in the business of manufacturing of machineries and equipments and development is for the same product. In view of this such expenditure cannot be held to be capital expenditure, but it is a revenue expenditure. In view of this, ground No. 3 of the appeal of the assessee is allowed.
21. In the result, appeal of the Revenue is dismissed and the appeal of the assessee is partly allowed.
The order is pronounced in the pen Court on : 12th July, 2018.
